Tax reform or purgatory for the Philippine economy

First read
IN an expansive figure of speech, Finance Secretary Carlos Dominguez declared that the Philippines is enjoying a “Cinderella moment” today. The Congress should seize the moment to pass the proposed comprehensive tax reform program (CTRP) which the finance department has laid out as the core of the administration’s economic program.

If the country is Cinderella, what is the glass slipper? Will the Filipino foot fit?

In two major statements in four days—one at the Manila Times business forum last Friday (February 10), and the other at a hearing of the House ways and means committee on Monday (February13)—Secretary Dominguez all but declared that the CTRP is the magical slipper that will transform the country into a 21stcentury economy.

Better than drug killings, federalism and an independent foreign policy, tax reform will unleash national energies for economic expansion and transformation.

Building a 21st century economy
In US administration, the most important Cabinet post is Secretary of State. In Philippine administration, the finance secretary is first among equals.

The country will go into “economic overdrive” under President Duterte, Dominguez told the Times forum.

The government will spend big not only on infrastructure and social protection for the poorest families, but also on education, health and skills training in order to prime the country’s youth for the challenges of a globally competitive job environment.

Dominguez stressed the urgent need for government to improve the job-related skills of young Filipinos because our ever-expanding labor force is one comparative advantage that can enable the Philippines to catch up with its more vibrant Asean neighbors and better compete with them for foreign investments.

He said: “Our population is nearing a demographic ‘sweet spot’ where millions of young Filipinos will be joining the workforce. We need to train them in the high skills required for a 21st century economy.”

To fulfill DU30’s pledge of sustaining high growth and making it truly inclusive, uplifting those citizens at society’s fringes, the government must spearhead efforts to make growth investment-led rather than consumption-led.

The administration’s ambitious spending on three key areas–infrastructure, human capital development and social protection–would enable it to realize its inclusive-growth agenda and reduce the rate of poverty incidence from the current 22 percent to 14 percent by 2022.

But to achieve this high goal, Dominguez stressed, “the government must be armed with ample revenues to implement its groundbreaking public investments program. This is why the role of the finance department is critical.”

Dominguez disclosed that even if the BIR and the customs bureau accomplish 100 percent of their targets, these would still not be enough to fund the government’s public investments program, which for infrastructure alone would require, according to budget department estimates, between P8 trillion and P9 trillion over the medium term.

The infrastructure gap raises costs all around and prevents our economy from being fully competitive. This compounds the poor investment rate.

Taking the more challenging path
In his statement before the House ways and means committee, Dominguez was more emphatic and comprehensive in selling the tax reform program.

He put the challenge squarely: “We are at a critical juncture today. The easier path is to continue with existing policies that might bring high growth that will also sadly maintain high poverty and economic exclusion. The more challenging path is to reform the fiscal and economic policies so that growth happens with equity.”

The first package under the CTRP will cut personal income tax rates, Dominguez said. “We are going to do this not only because it was a campaign promise of the President but, more important, because it makes good economic sense.”

The succeeding package under the CTRP aims to lower corporate income tax rates. “We cannot hope to attract foreign investment flows into our economy if our tax rates are substantially higher than those of neighboring economies. We seek to bring income taxes from the top rate of 32 percent to a more reasonable 25 percent,” he said.

The reductions in income taxes will be accompanied by a corresponding set of revenue-compensating measures, which seek to adjust the excise taxes on fuel and automobiles and expand the value-added tax (VAT) base, while retaining the exemptions enjoyed by seniors and persons with disabilities.

He warned legislators that unless the CTRP is passed soon enough, millions of the country’s hardcore poor, those with no skills and no opportunities, will remain trapped in poverty.

Tax reform will enable the government to raise an additional P718 billion for education, P139 billion for health, P267 billion for social protection, welfare and employment, and P1.73 trillion for urban and rural infrastructure.

Dominguez summed up his message cogently: “Without the tax reform package, our GDP growth cannot be sustained by at least 7 percent. Without a dramatic increase in investments, the country will be consigned to growth below 6 percent– a purgatory for an economy with great potential.”

The argument for lower income tax rates is compelling. Our people need relief from high income tax rates. We cannot attract the investments we need until we align our corporate tax rates with the regional average.

To compensate for lower tax rates, reform will broaden the tax base and introduce new revenue measures.

The entire tax reform package must be passed to ensure the needed gains in revenues to fund the ambitious public investments program of the administration

Dominguez painted a dire scenario if Congress chooses to pass only the popular reduction of the personal income tax, without the corresponding revenue-enhancing measures.

In this warning, the finance secretary is echoed by foreign banks and the credit rating agencies.

Net addition to economic growth
Deutsche Bank projects that the tax reform program will add 0.6percentage point (ppt) to the 6.5 percent to 7.5 percent gross domestic product (GDP) in 2017,if it is implemented this year, and another 0.2 ppt to the 7 percent to 8 percent outlook in 2018.

Deutsche concluded its analysis, to wit: “In our view, the passage of the first package would be a welcome development to a low-income country with one of the highest income tax rates in Asia.”

The Philippine government will face market scrutiny over its ability to shore up revenues this year even before the reforms kick in, and to keep the deficit within the 3 percent-to-GDP ceiling.

A loose fiscal stance of the government would prompt revisions of the country’s credit ratings.

Consequently, Philippine economic performance in 2017 will depend significantly on the realization of comprehensive tax reform, and the containment of political risks in the country.

Fitting the nation’s foot in the glass slipper is not a shoo-in. Cinderella will have to undergo the rigor of reform.

2 Comments

TAX is levied on earnings of businesses and individuals, and of consumptions of commodities that are dutiable. However in RP there is no levy on Accumulated Profits ( Retained Earnings ) and Reserves ( the playground of hokus-pokus of tne MNC ). These REs and Reserves are company resources that should have been used to enhance the businesses in forms of expansions ( from Reserves=economic growth ) or distribution to Owners ( REs = dividends=final tax for the gov’t ) or employees in the form of salary increases and bonuses (REs = deductions = employee upliftments). Taxes should be levied on those REs and Reserves (the beginning balance of the taxable year) as part of Amount Subject to Tax. In this way that the MNCs will be forced to better use those REs and Reserves instead of having them dormant.

I am the Tax officer of an MNC in MENA and that is how the government here enforce sustainable taxation.